Magazine

Iraq Deals: Who Got What--and Why

May 04, 2003

When U.S. government agencies awarded Halliburton Co. and Bechtel Group Inc. contracts to help rebuild Iraq, observers cried foul. Lawmakers, media commentators, and even British companies complained that politics was involved: Vice-President Dick Cheney, it was noted, ran Halliburton from 1995 to 2000, and Bechtel's Republican ties reach back generations. Moreover, the critics said, deals worth billions of dollars were being handed out in a secretive process that unfairly excluded foreign competitors. Not so, say government officials who oversaw the process. The contracts were awarded by career civil servants, not political appointees, on the basis of technical merit, following strict government rules.

Who's right? To find out, BusinessWeek interviewed companies and officials involved as well as government procurement experts. Much misinformation is floating around, but some of the critics' claims hold up. Here's what we found:

How was Halliburton chosen?

The company was selected in an emergency process that did not involve competitive bidding. The Army Corps of Engineers gave the contract to extinguish oil well fires to Halliburton subsidiary Kellogg Brown & Root because it had the "expertise and specialized resources." KBR, for example, helped douse some 300 Kuwaiti oil fires after the first Gulf War in 1991.

What's wrong with that?

Critics say the work was added, with no competitive bidding, to an existing contract under which KBR provides logistical support to the Army. The hotel and food bills for some 350 Office of Reconstruction & Humanitarian Assistance bureaucrats, most of whom were holed up at the Kuwait Hilton resort, are paid by KBR -- $5,000 a month per person, plus a markup, says an ORHA official. "That's an inexcusable waste of money that taxpayers shouldn't have to pay," says Representative Henry A. Waxman (D-Calif.), who has asked the General Accounting Office to investigate.

How was Bechtel selected?

Seven U.S. companies were secretly invited to bid in a limited competition allowed under the Foreign Assistance Act of 1961. While all seven had a track record on overseas projects in such places as Kosovo and Afghanistan, Bechtel's experience in Arabic-speaking nations carried the day. It employs more than 1,000 people in the Mideast, it's building a $1.7 billion aluminum smelter in Bahrain, and it's expanding a Saudi Arabia airport for $1.5 billion.

Why were the bidders all American?

USAID officials say the law requires them to use only U.S. suppliers. In addition, each bidder had to have a type of security clearance, which no foreign company possessed, to review classified documents handed out at a pre-bid conference. Overseas companies, however, are eligible for subcontracts. Besides, one USAID official says: "Imagine the furor if we chose European companies, using American tax dollars."

USAID also says it had to limit competition because it was working under a tight deadline. In the end, it took just 63 days to complete a process that usually takes 6 months. Why the haste? For political and humanitarian reasons, the Iraq project couldn't wait, says USAID Administrator Andrew S. Natsios: "We wanted it all in place so we could begin construction immediately."

Again, what's wrong with that?

Some members of Congress say they aren't satisfied by the constantly shifting explanations for the U.S.-only requirement. They may have a point. Natsios and other USAID officials have given a variety of reasons, and some don't hold up. One USAID official says that in January, Natsios waived the America-only requirement for all contractors, not just subcontractors, as USAID had claimed. He has the authority to do so, legal experts agree. But by then tacking on a security-clearance requirement, he wound up restricting the bidders to Americans only.

Why the need for security clearances?

The government was in something of a bind. It began accepting bids in February, before hostilities broke out. If word had leaked out that the U.S. was accepting proposals to rebuild Iraq before the war began, that could have undermined efforts to find a diplomatic solution. The U.S. did not want countries opposed to war, such as France, Germany and Russia, to conclude that military force was a fait accompli. So bids were sought from a limited number of companies with security clearances because they were thought to be able to keep the process confidential.

Why didn't USAID wait until the war ended?

That would have been too late. By having contractors at the ready, the U.S. can now pump billions of dollars into the shattered Iraq economy within months. And since Bechtel must hire Iraqi subcontractors and employees whenever possible, the U.S. can help jump-start the economy by creating thousands of jobs.

Just how lucrative are the Halliburton and Bechtel awards?

Getting the first contracts is a big advantage. A foot in the door with a new government could mean more money down the road. While some news reports pegged the value of the Halliburton deal at $7 billion, because Saddam Hussein didn't destroy much oil property, it's likely the contract won't go above $600 million. That means early press reports vastly overstated the ultimate value of the contract. But KBR could benefit once a privatized Iraq oil industry begins handing out oil-service contracts. Bechtel's contract, awarded on Apr. 17 by the State Dept., is worth $680 million, though up to half that amount is expected to go to subcontractors. Bechtel could also benefit if Iraq's economy thrives and the country can embark on a massive rehabilitation program.

Has the bidding process created long-term damage?

Perception is everything. By locking out foreign companies, critics say, U.S. agencies may be inviting other countries to exclude American companies from public-works projects. "We're holding ourselves out as the rogues of the international bidding process," says George Washington University law professor Steven L. Schooner. "We've created a public-relations nightmare." Critics of the Bush Administration would say that's par for the course. By Paula Dwyer in Washington, with Frederik Balfour in Kuwait City